Scouring the Business of Technology

The Perils of Free Market Economy

Off topic: Original post from the BusinessMirror article “The ‘unintended consequences’ of free markets”

Sure, free market economy trumps controlled economy (just look at the former Soviet Union and the impoverished state of North Korea). Even China opened up its economy to the world. But the the disadvantages does not necessarily outweigh the advantages. To wit,

Occurrence of crises

Financial crises are preceded by a concentration of demand on a particular asset class. This concentration generates price growth in the asset class, which in turn engenders more concentration. Demand outstrips supply and the price growth caused by this “snowball” effect eventually becomes much faster than the growth of the actual (and “intrinsic”) value of the asset class. This leads to an unsustainable price situation, which leads to a sudden price deflation of the asset class in question and the reverse occurs —supply caused by selling outstrips demand.

The asset class in question varies in history. Recently these asset classes include those from the emerging Asian markets (1997), telecom and technology (2000/2001), mortgages driven by cheap credit (2007/2008).

The fact that these crises occur in free markets does not mean that they are caused by free markets. Metaphorically, one cannot argue that just because sin is only possible where there is free will, having a free will is the cause of sin. Crises are a price we pay (pun intended) for free markets.

Free market monopolies

There are monopolies created by government fiat. There are, however, effective monopolies born of competition. More precisely, these latter monopolies are beget in free markets and because of some advantage, are able to establish dominance fairly quickly, i.e., before any competition could become a credible threat. Microsoft is one such example.

A free market capitalizes on the differences of its members. These differences show up in skills, in appreciation (or not) of opportunities, and in the manner in which (and speed with which) these skills are deployed vis-à-vis opportunities.

The system allows these differences to thrive and rewards those who can take advantage of opportunities. History has shown that winning this “competition of differences” has resulted in effective control by one organization of the market. In our current free-markets system, the only way paradoxically to prevent this concentration of control is by regulatory intervention, e.g., antitrust.

But here is the point of dialectic: Free markets encourage enterprise and rewards size, but only to a certain extent. The history of antitrust is one of defining just where that “extent” is.

Philosophically, the question might also be asked if perfect completion should follow free markets. What might a perfectly competitive market look like? It will have organizations of about the same size, competing against each other based purely on temporary advantages, i.e., advantages that never can result in permanent dominance of one over the other. There are advantages that are by definition temporary under free markets—price advantage, for example.

There are other advantages that once created are self-sustaining and very often create advantages difficult to surmount—scale, for example, or high-capital requirements. There are other advantages that might produce a longer-lasting impact—a product or technological improvement protected by patent, for example. The point here is that in a perfectly competitive market, competitive advantages are naturally democratized to the system’s members, i.e., made readily available to all and never allowed to be controlled by any one member (or set of members) or institutionally monopolised to create in-built and long-term advantages.

Income inequality

This brings me to the third “unintended consequence,” that of income inequality. Works have been written to show how capitalism has effectively lifted economic real incomes of societies over time. It’s easy to argue that the inequality is, but a stage – and I agree it is – but the issue refuses to rest. Perhaps the aim of free markets is to democratize competitive advantages. Perhaps income disparities in such a world would be smaller. Perhaps the “ideal” socio-economic organization is a system of similarly-sized shop-keepers and enterprises, all nonetheless freely competing. The question, of course, is: What are the philosophical implications of such a society and how do we create it?